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Fitch affirms Bulgaria's UniCredit Bulbank at BBB-, UBB at A-

Fitch affirms Bulgaria's UniCredit Bulbank at BBB-, UBB at A- gary yim/

SOFIA (Bulgaria), June 3 (SeeNews) - Fitch Ratings said on Monday that it has affirmed the long-term Issuer Default Ratings (IDRs) of Bulgarian lenders UniCredit Bulbank at 'BBB-' and of United Bulgarian Bank (UBB) at 'A-', with negative and stable outlook, respectively.

The affirmation of Bulbank's and UBB's ratings reflects Fitch's opinion that there is a high and extremely high probability that they would be supported, if required, by their respective parents - UniCredit S.p.A. and KBC Bank, the rating agency said in a statement.

Fitch also said in the statement:



Bulbank and UBB are based in central and eastern Europe (CEE), which is a strategically important region for both UniCredit and KBC. The banks' synergies with their respective parents are strong and reflect a high level of management and operational integration. Support for Bulbank is also underpinned by a long record of supporting its parent's objectives, which is likely to continue. In our assessment of support we also consider the almost full ownership of Bulbank and UBB by their parents and the potential high reputational risk to the owners if their Bulgarian subsidiaries default.

We believe that any required support for the two banks would be immaterial relative to their respective parents' ability to provide it. Our opinion reflects the owners' solid credit profiles and the small size of their Bulgarian subsidiaries. The support for Bulbank is notched once from UniCredit's IDR. We use KBC's Viability Rating (VR) as the anchor rating in assessing the parent's ability to support UBB because of uncertainty over whether or not UBB's senior creditors would benefit from KBC's junior debt buffer if UBB fails.

The Negative Outlook on Bulbank's Long-Term IDR mirrors that on the parent. The Stable Outlook on UBB's Long-Term IDR reflects its parent's stable intrinsic creditworthiness.

UBB's Short-Term IDR of 'F1' is the higher of the two possibilities corresponding to the Long-Term IDR of 'A-'. The bank's Short-Term IDR is underpinned by KBC's solid liquidity and our view that parental propensity to support is more certain in the near term.

The challenging domestic operating environment has weighed on the through-the-cycle performance of Bulgarian banks. As a result, most VRs of Bulgarian banks are compressed in the 'bb' range, despite their largely robust capital buffers, moderate risk appetites, low refinancing risks and moderate profitability.

Bulbank's VR of 'bb+' is one notch above our assessment of the Bulgarian operating environments and is underpinned by its robust capitalisation and solid profitability through the cycle. The VR also reflects stable funding, comfortable liquidity and its leading domestic market franchise and substantial resolution of bad debts to normalised levels.

UBB's VR of 'bb' is underpinned by its robust funding and liquidity profile, strong capitalisation and significant restructuring of its legacy impaired loans. We also take into consideration moderation of UBB's risk appetite and strengthening of its company profile (particularly lending and deposit franchise), management and strategy under KBC ownership (since 1Q18).

We believe that asset quality in 2019 and beyond at both banks will benefit from contained inflow of new bad debts, conservative origination of new loans and a supportive economic environment. Both expect further loan growth in 2019, but we do not expect this to be achieved through a loosening of credit standards. The underlying growth at UBB is likely to be offset by the bank's further substantial reduction in problem assets.

At end-2018, the banks' impaired loans ratios (comprising Stage 3 loans) were 6.2% (Bulbank) and 15.4% (UBB), compared with the sector average of about 11%. The higher ratio at UBB reflects legacy loans originated at relaxed standards, which the bank has been resolving. The ratio of all loan-loss allowances to impaired loans was strong at Bulbank (88%) and moderate at UBB (50%).

Bulbank and UBB's capitalisation is a rating strength due to their high Fitch Core Capital (FCC) ratios, moderate risk profiles, ordinary capital support from their respective parents and low (Bulbank) and moderate (UBB) stock of unreserved impaired loans. Bulbank's capitalisation is particularly strong due to its substantial capital surplus over regulatory minimums. At end-2018, the FCC ratios adjusted for announced dividends of Bulbank (24.5%) and UBB (19.3%) were among the highest in CEE.

We believe that the banks' profitability is commensurate with their business models and Bulgarian operating environment. Their revenue is mainly sourced from lending activity. Bulbank's profitability is the strongest among all Fitch-rated Bulgarian banks. This reflects its stable business model and resilient margins through-the-cycle, strong franchise, contained loan impairment charges (LICs) and robust cost efficiency. UBB's profitability improved in 2018 driven by strengthened capacity for recurring revenue generation and a positive impact from provision releases. The UBB's cost efficiency is set to improve as integration costs dissipate. UBB's operating profit is likely to benefit from considerably lower LICs than the historical average.

Bulbank's ratio of operating profit/risk-weighted assets was the most resilient over the economic cycle and averaged 4.1% between 2015 and 2018. UBB's ratio recovered strongly in 2018 and we expect it to remain comfortably above 2.5%.

Funding and liquidity is a rating strength at both banks relative to their overall credit risk profiles. The banks are self-funded with stable and largely granular customer deposits. Their high self-financing capacity is reflected in their moderate gross loans/deposits ratios, which equalled 75% (Bulbank) and 69% (UBB) at end-2018. Bulbank and UBB hold comfortable liquidity buffers and can also rely on ordinary parent liquidity support, such as access to funding in foreign currency. The two banks' well-diversified and stable deposit franchises are sufficient to withstand even a severe market stress.

At end-1Q19, Bulbank was one of the two largest banks in Bulgaria and controlled almost 20% of sector's assets. UBB was ranked third with a market share of about 11%. Both banks are classified as systemically important credit institutions by the Bulgarian central bank. They operate similar and traditional banking models, with loan books dominated by corporate clients at Bulbank or balanced between retail and non-retail at UBB, and funding sourced mainly from local customer deposits. The banks' risk appetites are largely harmonised and reflect the risks of the operating environment as country risks cannot be isolated from the effects of their business models. Underwriting standards at Bulbank and UBB are reasonable and commensurate with their business models and country risks.



The IDRs and Support Ratings of Bulbank and UBB are sensitive to our view of ability or propensity of their respective parents to support their Bulgarian subsidiaries. We do not expect the banks' owners' support propensity to weaken.

The upgrade of UBB's IDR would require both an upgrade of Bulgaria's Country Ceiling and an upgrade of KBC Bank's VR or more clarity around the potential benefit for UBB senior creditors from the qualifying junior debt buffer at the parent level.

Bulbank and UBB's VR upgrade would require an improvement of the operating environment or strengthening of the UBB's overall credit risk profile (particularly a further significant reduction of its high impaired loans).

Deterioration in the operating environment, which would result in a substantial inflow of new bad debts and capital erosion at the banks, could lead to their downgrade."